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pSivida Corporation (NASDAQ:PSDV)

F2Q 2013 Earnings Call

February 6, 2013 4:30 PM ET

Executives

Lori Freedman - General Counsel and VP, Corporate Affairs

Paul Ashton – President and CEO

Len Ross – VP, Corporate Affairs, General Counsel and Corporate Secretary

Operator

Good day ladies and gentlemen, and welcome to the second quarter 2013 pSivida Corporation earnings conference call. At this time, all participants are in a listen-only mode. Later, we’ll have a question-and-answer session, and instructions will follow at that time. If anyone should require assistance during the conference, please press star and then zero on your touchtone telephone.

As a reminder, today’s conference is being recorded for replay purposes. I would now like to turn the conference over to your host for today, Mr. Lori Freedman, General Counsel and VP of Corporate Affairs. Ma’am, you may begin.

Lori Freedman

Thank you, Mary. Good afternoon everyone and thank you for joining us. After the market closed today, we released our second quarter financial results for fiscal 2013. A copy of the release is available in the investor section of our Web site at www.psivida.com.

On the call today with me is Dr. Paul Ashton, President and Chief Executive Officer; and Len Ross, our Vice President, Finance. Before I hand the call over to Paul, I need to remind everyone that some of our prepared remarks or an answer to your questions may be forward-looking in nature.

Forward-looking statements are inherently subject to risks and uncertainties. All statements other than statements of historical fact are forward-looking statements, and we cannot guarantee that the results and other expectations expressed, anticipated, or implied will be realized. Actual results could differ materially from those anticipated, estimated, or projected in the forward-looking statements. For more detailed discussion of the risk factors that could impact our future results and financial condition, I’ll refer you to our filings with the SEC including our annual report on Form 10-K for the fiscal year ended June 30th 2012.

We undertake no obligation to update any forward-looking statement in order to reflect events or circumstances that may arise after this conference call. With that, I’d like to turn the call over to Paul.

Paul Ashton

Thank you, Lori, and welcome everyone as we discuss the results of our second quarter of fiscal 2013.

I’d like to start with focusing you on our strategy. As previously discussed, we have begun our transition from a license-based drug delivery company relying exclusively on partnerships to develop and commercialize our products to a specialty pharma model.

We plan to use some of the revenues generated and lessons learned from our partnerships to develop some of our own products ourselves. Of course, we will still look to enter into collaboration agreements where it’s appropriate for example in the development of new chemical entities or for products requiring complex or very expensive clinical trials.

But increasingly, we look to develop our own products. Now, moving from strategy to tactics, our lead development product, which we plan to move forward ourselves without a partner is our micro-insert to treat posterior uveitis.

We expect it will begin Phase III clinical trials next quarter on schedule. We are continuing to engage in pre-clinical studies of Tethadur, our technology system to deliver proteins and antibodies, and we’re encouraged by the results so far.

Finally, Alimera Sciences, our partner on the ILUVIEN for diabetic macular edema, has announced plans for its direct commercial launch in Germany by the end of this quarter. ILUVIEN for DME has now received marketing authorization in Germany, France, Austria, Spain, Portugal, and the U.K.

With respect to U.S. approval, Alimera has reported that it intends to resubmit the NDA later this quarter. US approval would trigger a $25 million milestone payment to us and a profit share.

Finally, with respect to our capital resources, we ended the quarter with over $15.7 million in cash and cash equivalents, which we believe should enable us to maintain our current and planned operations into the first quarter of calendar year 2014 including our Phase III clinical trials for posterior uveitis planned for this fiscal year.

Those are the headlines. I’ll get into more details now before handing the call over to Len Ross who will take you through the financial results.

First, let’s talk about uveitis. Uveitis affecting the back of the eye or posterior segment is an orphan disease affecting just under 200,000 people in the U.S., but it’s a serious one and it’s difficult to treat.

It’s the third or fourth leading cause of blindness in the U.S. with an estimated 30,000 cases of blindness. Uveitis is defined as inflammation of the uveal tract, which is one of the inner linings of the eye. And like many autoimmune diseases, it has many different triggers, it can occur spontaneously, and in some cases it’s idiopathic. The mainstay of current therapy is off-the-label use of systemic steroids.

While this works well for some patients, generally, in order to get enough drug to the eye, there’s a significant exposure of the entire body to the drug. Systemic steroids can have a significant and sometimes intolerable set of side effects.

And these can require patients to switch from steroids to immune-modulating drugs that can themselves have their own significant side effects. And finally, of course, the daily doses required create significant issues of patient compliance.

Beyond systemic steroids, there are two FDA approved products to treat the disease, our product Retisert licensed to and sold by Bausch & Lomb; and Ozurdex sold by Allergan. Unfortunately neither of these products have succeeded in significantly changing the management of the disease in most patients.

As a result, uveitis patients continue to be treated poorly, which is why proportionately so many of them lose vision. So why do we think our micro-insert could succeed over systemic steroids where Retisert and Ozurdex have not. Well, this is the same micro-insert that’s been approved in the EU for diabetic macular edema under the name ILUVIEN, so we know exactly how it works.

First, we do not expect the type of systemic side effects that you see with systemic steroids. Our micro-insert delivers a tiny amount of steroid directly to the back of the eye where it’s needed.

Although it releases drug for approximately three years, the total amount of drug delivered over this time is tiny. It’s about half of what’s in a single daily eye drop. The systemic exposure from the micro-insert is therefore incredibly low -- so low in fact we can’t even measure it. We believe the chances of seeing systemic toxicity in Phase III trials is correspondingly low.

Next, although, of course, we will need to await for the outcome of our Phase III trials, we believe our micro-insert will be efficacious. The micro-insert delivers Fluocinolone acetonide. This is the same drug that’s in our FDA approved Retisert, so we know that the drug works in uveitis.

Our clinical trials in DME with ILUVIEN have shown that our micro-insert delivers the drug and maintains the dosage for up to three years after injection. We also believe that micro-insert will solve some of the issues that have challenged Retisert. Number one, Retisert requires a surgery to implant it into the eye. And number two, it can cause some ocular side effects in some patients. The most serious of which is increased intraocular pressure or IOP.

So, we designed the micro-insert specifically to overcome these problems. How successful were we? Well, surgery is not an issue. The micro-inserts are injected into the eye rather than implanted into the eye.

The uveitis micro-insert is designed to be inserted via the 27 gauge needle. That’s the same size that is routinely used for injecting solutions or drugs into the eye, and this can be done in an office visit.

Second, we’re optimistic that our Phase III trials for uveitis will show a significantly improved IOP, that is intraocular pressure side effect profile over the Retisert product trials. Data from the fame and famous clinical studies of the micro-insert in DME, which involved around 1000 patients show that the new micro-insert in DME presented a significantly better side effect profile than Retisert.

The incidence of elevated IOP with the micro-insert in the DME trials was reduced by a factor of three compared to DME patients in Retisert trials, and perhaps more significantly still, the percentage of patients whose IOP needed a procedure was reduced by a factor of seven.

So, we have a product about to enter Phase III trials that releases the same drug as Retisert, a drug that we know works to treat uveitis. We have seen in the DME trials that the micro-insert will release the drug up to three years, and we expect to see a similar side effect profile in our posterior uveitis trials to that seen in the ILUVIEN in DME trials. And that’s an improvement over that observed with the FDA approved Retisert.

We have been asked why the FDA would approve the micro-insert for posterior uveitis when they have not, or at least so far approved the same implants for DME.

While I get to the DME story shortly, however, we believe that the risk versus benefit profile in posterior uveitis is likely to be viewed different by the FDA than in DME. The approval of Retisert for posterior uveitis indicates that the FDA was, at least in that case, willing to accept some side effects as an acceptable trade-off for an effective therapy in the treatment of uveitis.

So while there are no guarantees? We’re hopeful that our micro-insert will have similar efficacy as Retisert, but with a far better side effect profile, and hence, an even better risk/benefit ratio. And as a result, the FDA will find that improved ratio as acceptable.

On the subject to the FDA, the FDA cleared the IND for the micro-insert to go straight into two pivotal Phase III clinical trials in posterior uveitis. We are planning a total of approximately 300 patients in those trials which will have as the primary end point recurrence of disease at 12 months.

The FDA has agreed we can reference much of the preclinical and clinical data including the human safety data already supplied under the NDA for ILUVIEN for DME. The ability to access this data both shortens and simplifies the regulatory process.

In addition to the Phase III trial about to start, there is already an ongoing investigator-sponsored Phase II clinical study of our micro-insert in posterior uveitis. This trial completed enrollment ahead of schedule and has recently being expanded to include more patients. Again, the posterior uveitis insert is our own product and is not licensed to Alimera or indeed anyone else.

Now, let’s talk briefly about Tethadur, our peptide protein delivery platform. Tethadur is based on BioSilicon, our other Technology Platform. Tethadur has the potential to provide sustained release of proteins and peptides in many therapeutic areas.

It’s currently being evaluated in ophthalmology under an agreement with the leading global biopharmaceutical company, and we are studying its use in systemic delivery as well and it’s been in the latanoprost product partnered with Pfizer.

In the ophthalmic area, a sustained delivery system for proteins and antibodies lasting three or even better still six months could offer clinical advance over existing therapies, which require repeat injections into the eye every one or two months.

Now, another potentially significant application for our platform Tethadur technology is systemic delivery of proteins and peptides, particularly as biosimilar molecules begin to make their way on to the market.

Simply put, a system that could offer a way to make [indiscernible]. A sustained delivery system for a peptide or protein like Tethadur, could offer a way to make biosimilar biobetter.

The technical barrier for systemic delivery of peptide and proteins is likely to be lower for the delivery systemically than it is for the ophthalmic applications.

Whereas the delivery system for a protein in the eye, may need to provide sustained delivery for three or even six months, an optimal delivery system for a systemically delivered peptide or protein may only have to provide sustained release for a month or in some cases a week.

Now, let’s move on to the progress Alimera is making with ILUVIEN for DME in Europe. Alimera has said it anticipates commercial launch in Germany later this quarter followed by launches in the UK and France later this year.

Thus farILUVIEN for DME has received marketing authorizations in six EU countries; Austria, France, Germany, Portugal, Spain, and the UK, and has been recommended for marketing authorization in Italy, and it has been approved for the treatment of vision impairment associated with chronic diabetic macular edema considered insufficiently responsive to available therapies.

Alimera has estimated that there are approximately 1 million people suffering from DME in the seven EU countries where marketing authorization has either been received or recommended. Alimera recently posted its views on the size of the market and its revenue expectations going through 2017 on its Web site.

Our agreement with Alimera entitles us to receive 20% of net profit as defined on a country-by-country basis from Alimera’s direct commercialization of ILUVIEN for DME. Alimera has completed a $40 million financing to help fund the launch of the product and has reported hiring a senior EU-based team to augment the sales force provided by Quintiles.

Alimera has also announced that it intends to resubmit the NDA for ILUVIEN for diabetic macular edema to the FDA by the end of next month. Alimera reported that it plans to respond to the issues raised by the FDA in its 2011, complete response letter including additional analysis of the benefits and risks of ILUVIEN based on the clinical data from Alimera’s two previously completed Phase III clinical trials.

The revised application is to focus on the population of patients with chronic DME considered insufficiently responsive to available therapies, the same group for which marketing approval for ILUVIEN was granted in the various EU countries. Approval in the US would entitle us to $25 million milestone payment and 20% of net profit as defined from US sales of ILUVIEN by Alimera.

So all told, we have had a very good quarter. We ended the quarter with $15.7 million in cash and no debt.

And with that, I’ll turn the call over to Len to take us through the financials. Len?

Len Ross

Thank you, Paul. Good afternoon, everyone. I will briefly review our second quarter fiscal year 2013 results reported earlier today, starting with our financial position. As Paul mentioned, at December 31, 2012, we had cash, cash equivalents, and marketable securities of $15.7 million, a net decrease of $1.9 million during the quarter.

We anticipate that these capital resources, together with expected royalty income from Bausch & Lomb, should enable us to fund our current and planned operations into the first quarter of calendar year 2014, including planned Phase III clinical trials of the posterior uveitis micro-insert expected to commence during the current fiscal year. Funding of our operations beyond then is expected to depend on the amount and timing of cash receipts pursuant to our existing collaborations with Alimera, Bausch & Lomb, and Pfizer, as well as any funding from any possible future collaborations and/or financing transactions.

As Paul mentioned, Alimera has reported its intention to proceed with the direct commercial launch of ILUVIEN for DME in Germany in the current quarter and in the UK and France later in 2013. As reported previously, we are entitled to a 20% share of net profits as defined, measured quarterly on a country-by-country basis under the terms of our collaboration agreement. However, we do not know if and when Alimera will achieve net profits in each EU country where it has marketing approval and intends to commercialize ILUVIEN directly or the amount or timing of any amounts we might receive.

Turning to our results for the second quarter ended December 31, 2012, we reported revenues of $585,000 compared to $630,000 for the same period last year. Collaborative research and development revenue was down slightly with lower recognition from the restated Pfizer agreement because we have increased our estimates of the cost and the duration of the latanoprost research program, largely offset by other research and development revenue. Royalty income in the quarter from sales of Retisert and Vitrasert by Bausch & Lomb decreased to $390,000 compared to $426,000 in the prior year quarter.

Research and development expense totaled $1.6 million for the quarter ended December 2012 compared to $2 million in the prior year period, primarily attributable to reduced amortization of intangible assets resulting from our $14.8 million intangible asset impairment write-down in last year’s second quarter.

As previously reported, we may significantly increase our research and development expense during a remainder of fiscal year 2013 if we initiate internally funded Phase III clinical trials of our sustained release micro-insert to treat posterior uveitis during fiscal 2013 as planned.

General and administrative expense totaled $1.7 million for the quarter-ended December 2012 compared to $1.5 million last year primarily attributable to higher incentive compensation accruals. Operating expenses for the prior year second quarter also included $14.8 million intangible asset impairment write down mentioned above.

Net loss for the three months ended December 2012 was $2.6 million or $0.11 per share compared to a net loss of $17.5 million or $0.84 per share for the prior year quarter.

Turning now to our six-month year-to-date results; Revenues decreased by $1.1 million for the six months ended December 2012 compared to $2.3 million for the same period of the prior fiscal year.

Collaborative research and development decreased primarily as a result of $1.1 million of revenue recognized in the prior year period due to the termination of the license for nutraceutical and food science applications of BioSilicon.

Royalty income from Bausch & Lomb increased by $150,000, primarily related to increased sales of the Retisert product. Research and development decreased by $1 million to $3.1 million for the fiscal 2013 year-to-date period compared to $4.1 million in the prior year. This decrease was primarily attributable to a $1.3 million decrease in amortization of intangible assets, resulting from last year’s intangible asset write down partially offset by increased personnel expenses.

General and administrative expense decreased by $234,000 to $3.3 million for the six months ended December 2012 from $3.5 million in the prior-year period. This decrease was primarily attributable to lower professional fees and stock-based compensation, partially offset by higher incentive compensation accruals.

Net loss for the six months ended December 2012 was $5.2 million or $0.23 per share compared to a net loss of $19.9 million or $0.96 per share for the six months ended December 2011.

I will now turn the call back over to Paul.

Paul Ashton

Great. Thanks, Len. So to sum up, it’s been another excellent quarter for us as we start the transition in our strategy from a license-based drug delivery company to a specialty pharma company. We are making good progress in preparing for the two pivotal Phase III clinical trials for micro-insert for posterior uveitis, which we expect will begin enrolling patients on schedule next quarter.

We continue to be pleased with our preclinical research on our Tethadur peptide protein delivery system and are working with a major player in ophthalmic applications of this platform technology. ILUVIEN for DME is also progressing with first commercial sales in Germany expected next month followed by launches in the UK and France later in the year, and we expect to see Alimera refiling the NDA for ILUVIEN for DME in the US later this quarter.

At this point, we’d be happy to take your questions. Operator, would you please initiate the Q&A portion of the call?

Question-And-Answer Session

Operator

(Operator Instructions) I show no questions at this time. Can I turn the conference back to Paul Ashton for closing remarks?

Paul Ashton

Great. Thank you. Okay, I’d like to thank all of you for joining us today and I look forward to speaking with you again next quarter. In the meantime, if you have additional questions, please feel free to contact us. Thank you.

Operator

Ladies and gentlemen, thank you for your participation in today’s conference. This does conclude the program, and you may all disconnect at this time.

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